(Team IELR) In a significant ruling, the Securities and Exchange Board of India (SEBI) issued an interim order on April 19, 2024, followed by a final order on July 24, 2024, against Linde India Limited (LIL). SEBI's decision centred on LIL's failure to obtain shareholder approval for material Related Party Transactions (RPTs), as required by regulation 23(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). The RPT in question involved Praxair India Private Limited (PIPL), a wholly-owned step-down subsidiary of LIL's holding company, where LIL and PIPL formed a joint venture to allocate products and geographies between the related parties—a business division arrangement.
As per regulation 23(1) of LODR, related party transactions exceeding 10% of the annual consolidated turnover of the listed entity, as per the last audited financial statements of the listed entity, are deemed material and necessitate approval from the company's shareholders. LIL based its defence on the wording in the definition of RPTs, asserting that transactions should only be aggregated for the 10% threshold if they are linked by a common objective or are ancillary to a single contract.
SEBI rejected LIL's interpretation, clarifying that regulation 23(1) of LODR explicitly states that when determining whether the materiality threshold has been crossed, all transactions with the same related party during a financial year must be considered collectively. SEBI further emphasized that reliance on the narrow definition of RPT to support LIL’s argument was not appropriate.
LIL contended that an agreement to divide future business lines did not constitute an RPT since it did not involve a direct exchange of assets or services. SEBI disagreed with this view, reasoning that allocating a revenue-generating business segment within a company could significantly impact the company’s financials. SEBI suggested that the impact of such a transaction could best be understood through a valuation or impact assessment exercise.
SEBI pointed out that accepting LIL's argument would imply that a company's board could transfer an entire business vertical to a related party without needing shareholder approval. This could pose significant risks, as the potential impact of such a transaction cannot be accurately gauged without a proper valuation. SEBI illustrated this by referring to LIL's two main business segments—Gases and related products, and Projects Engineering Division. It argued that even if the transaction is framed as a division of future business rather than a current transaction, it effectively redistributes business opportunities between related parties, potentially harming LIL's future growth prospects.
SEBI concluded that such seemingly benign reallocations of business could present significant risks to LIL's public shareholders, as they could lead to a redistribution of corporate business and opportunities that would otherwise benefit the company. The final order underscores the need for strict adherence to regulatory requirements concerning RPTs to protect shareholder interests and maintain transparency in corporate governance.
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